Hsu: Banks must document CECL methodologies, assumptions

With many banks expected to implement the current expected credit loss accounting standard in 2023, Acting Comptroller of the Currency Michael Hsu today discussed the OCC’s expectations for banks moving to CECL. In particular, Hsu cautioned that “the flexibility CECL provides must be exercised in a disciplined manner to ensure safety and soundness. There needs to be appropriate support and documentation of management’s judgments.”

He added that “we expect thoughtful documentation of the methodology selected, as well as management’s assumptions, decisions, expectations, and qualitative adjustments,” and that examiners would be “closely monitoring” any changes firms make to their credit loss methodology and assumptions. “We understand and expect that credit loss estimates will change with the economic outlook and as new information surfaces,” Hsu noted. “However, any changes to credit loss estimates need to be appropriately supported and documented.”

Hsu also touched on the issue of diversity and inclusion in the banking industry, calling for more action from banks to achieve diversity at every organizational level, including bank boards. Among other things, Hsu said the OCC will expect “more transparency from the financial services industry—particularly large banks—about the diversity of their boards and executive leadership.” In addition, the OCC is “exploring and considering other steps,” such requirements for banks to diversify their board or explain why they have not done so.